Current Status of SB 141 fiasco
30 September 2006Gayle Harbo Retired after teaching mathematics in Fairbanks for 25 years. She was very good at what she did. In 1989 she was named Alaska Teacher of the Year. She is still very good at what she does, but now she is Secretary of the Alaska Retirement Management Board (ARMB). As such, she is one of nine trustees that have fiduciary responsibility for the billions of dollars of assets of the state’s retirement systems (there are seven different retirement systems!).
Ms. Harbo is also a member of the Alaska Retired Educators Association (AKREA), which is a local affiliate of the National Retired Teachers Association (NRTA). In a recent AKREA newsletter, Ms. Harbo wrote an excellent summary of the history and consequences of SB 141, which destroyed the pension system for Alaskan public employees. I am pleased to reprint her excellent article here. Note that additional information on SB 141 and related issues can be found on the ACPP blog under the blog category “Retirement Security.”
Most of our members, both active and retired, are well versed in the ramifications of SB141, passed in May ‘05, because of the Speaker’s Cadre which visited many schools this spring. The hastily written bill, over 100 pages in length, was so poorly crafted that it required almost 40 pages of corrections, introduced in the ‘06 Legislature as HB475. HB 475, however, did not pass, nor did an effort to delay implementation until more information could be gathered regarding the effect of SB141 on employers, employees and communities.Senate Bill 141 put in place a system more expensive than PERS Tier III and did nothing to address the unfunded liability. It created a closed system for those employees hired prior to July 1, 2006. PERS, a system with almost 31, 000 active members and 18, 400 retirees has 160 employers. TRS has over 9600 active members and over 9000 retirees, a ratio of almost 1:1. There are 58 employers in the TRS system.
Proponents of SB141 should have done a bit more homework before imposing a Defined Contribution on new employees. They should have paid more attention to funding ratios, rather than dollar amounts. For the 2005 valuation performed by the new actuary, Buck Consultants, the PERS funding ratio for total benefits was 70%, in 1979 the funding ratio was 68%, yet the funds recovered without Draconian measures. For TRS the funding ratio in ‘05 was 61%, in 1980 it was 67%.. Part of the reason for the difference between the PERS and TRS funding ratios is the number of actives contributing compared to the number of retirees receiving benefits and also the fact that in the 80’s the state failed to fund the TRS system for 2 consecutive years, so dollars which could have been earning interest were lost.
More interesting in the use of funding ratios, is the comparing assets to liabilities without including health care costs. Alaska is one of only four states, eight systems, which pre-funds health care. Without health care, the funding ratio for PERS is 119% and for TRS, 91%. These are important figures and speak to the only problem the Legislature should have addressed - how creating a system for new employees which retained the Defined Benefit component for the retiree’s monthly benefit, while addressing the issue of quality health care.
Legislators who encouraged waiting to implement the bill realized that part of the problem was the poor data supplied by the previous actuary to the TRS and PERS Boards. Mercer had been used for over 20 years and when the Boards requested an audit in 2001, the auditor, Milliman found that Mercer had made gross errors in calculating health care costs. The correction of these errors is the reason for half of the increase in the employer rates as calculated from the 2002 valuation and in each future calculation. Mercer underestimated the impact of early retirement programs and of allowing elected officials join the systems.
The new actuary, Buck, continues to find Mercer errors, even after the audit. In March it was revealed that in the 2004 valuation Mercer underestimated healthcare benefits in PERS by 7% and in August another error in the same valuation regarding the Judicial system revealed an error in health care that resulted in an increase in the recommended employer contribution of almost 14%, from 37% to 51%. Let us not forget that Mercer is the actuary who advised the Administration and the Legislature on SB141. Would you trust Mercer’s advice? Dollars paid to Mercer by the Administration increased from $350,000 in FY ‘01 to $560,000 in FY’06, yet the Department of Law of this same Administration is reviewing Mercer’s errors in past valuation reports in consideration of recovering costs.
The Alaska Retirement Management Board faced with resolving the liabilities of a system that is now closed to new employees offered a solution and recommendation to the Legislature in March of ‘06 after receiving Buck’s evaluation of Mercer’s 2004 valuation. The Legislature did nothing with any suggestion offered to help pay down the debt in either 2005 or 2006.
The result of the closed system is a huge jump, for FY’08, in the employer contribution rates. The rates for PERS will be 39% and for TRS 54%. These rates reflect a change from use of a percentage payroll method to a level dollar amount contribution - they reflect reality of the debt. It is important to remember that these rates imply the goal of a funding ratio of 100%, while even the Attorney General’s office says a system is healthy at 80%. It is also important to remember that without health care, a benefit not provided by most systems, TRS is at 91% and PERS at 119%. A hybrid system with a Defined Benefit and modified health care program would have solved the problem, not a Defined Contribution plan which solves nothing.
It is important that the new Governor involve the parties affected by the retirement systems, employees and employers, in crafting a solution which provides security to retirees and a stable workforce to schools, public safety and state services. It is not too late to go back. In speaking against a delay in implementation SB141 Senator Bert Stedman said if we delayed by even one year we would have 4400 more new employees under the Defined Benefit plans. His predictions are way off the mark. As of September 1, only 200 new employees enrolled under the DC plan. Of the 218 PERS and TRS employers, only one, the State of Alaska, has given its non-vested employees the option to change from DB to DC. Only 5 have made the change.
Let us work together with the new Governor to make Alaska proud. Let us work to return to a system which will attract a stable quality workforce and keep Alaska as a place where people come and make their homes and raise their families.
October 2nd, 2006 at 5:04 pm
A well-researched, well-organized article. As a UAA retiree, I plan to visit the apcc web site often for additional legislative updates.